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The Impact of Cross-Chairpersonship on Auditor Choice

Baydoun, N and Whittred, G (1997). The Impact of Cross-Chairpersonship on Auditor Choice. In: 9th Asian-Pacific Conference on International Accounting Issues, Bangkok, Thailand, 23-26 November 1997.

Document type: Conference Paper
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Author Baydoun, N
Whittred, G
Title The Impact of Cross-Chairpersonship on Auditor Choice
Conference Name 9th Asian-Pacific Conference on International Accounting Issues
Conference Location Bangkok, Thailand
Conference Dates 23-26 November 1997
Place of Publication California
Publisher California State University
Publication Year 1997
HERDC Category E3 - Conference Publication - Extract of paper (internal)
Abstract The determinants of firms choice of auditor have received considerable attention in recent years. Theories relating to "agency costs" and "product differentiation" have been extensively examined. With respect to the former Francis and Wilson (1988, p. 668) observe: ... only a weak association has been demonstrated to exist between agency cost proxies and audit firm choice with little interstudy consistency. The evidence in support of the latter (specifically, a "Big 8" fee premium) seems stronger. Interestingly, the demand for quality differentiated audits is often explained in terms of agency/contracting costs, and most recently, also in terms of industry specialisation (Craswell et. al., 1995). While "economic" determinants of auditor choice have been closely examined, little attention has been paid to "non-economic" factors. Yet, if the popular press and the recent debate over corporate governance are any guide, cultural and environmental factors also seem likely to play a role. One of the few such studies is Davidson, Stening and Wan (1984). Davidson et. al. (1984) examine the effect of interlocking directorates on Australian companies choice of auditor. Two companies were deemed to be interlocked when they had at least one director in common. They conclude (p. 316): ... links between companies audited by the same public accounting firms .... can be explained to a considerable extent by the links provided by those companies having common directors. In this paper we investigate the impact of interlocking directorates and, specifically, the cross-chairpersonship of the Board of Directors on Hong Kong companies choice of auditor. Section 2 briefly reviews the evidence on "family" control of Hong Kong listed corporations. Section 3 examines the relationship between cross-chairs and auditor choice, while section 4 contains our conclusions. In brief, there is (at least over the time period of this study) a significant association between cross-chairs and auditor choice even after controlling for the industry expertise of the auditors. There is also little evidence that cross-chaired companies rely more heavily on alternative governance mechanisms to address any potential threats to the "independence" of their chosen auditors.
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